1. Linking Business with Responsible Forest Management Addressing Legality in China Wood Supply Chains Presentation to the Chatham House/IUCN Update Meeting on Illegal Logging & Associated Trade Matthew Brady TFT China Project Manager April 26th 2007; Beijing, China

2. Linking Business with Responsible Forest Management What is the TFT? An International membership based Organization Offices in the UK, Switzerland, Indonesia, Malaysia, Viet Nam, China & Gabon (USA & Australia in 2007) Registered as a non-profit in UK & US 44 members & growing 56 staff and growing

3. Linking Business with Responsible Forest Management What do we do? We help our members Link their supply chains From here To here Using FSC wood…OR Wood moving toward FSC OR, at a minimum, wood that is legal ‘beyond reasonable doubt’

4. Linking Business with Responsible Forest Management TFT’s work with trade & industry Assists those trading in tropical wood products to link supply chains to well managed forests. Help forest managers to achieve FSC certification. Activities centered in South East Asia, Africa, South America, Vietnam and China

5. Linking Business with Responsible Forest Management TFT’s work with trade & industry Work with factories & buyers to monitor wood sources & supply chains. Verify that raw material is legal & from well managed forests. This helps to establish environmental credibility for timber product traders.

6. Linking Business with Responsible Forest Management TFT in China Member services DEFRA Project (Started in 2006) Sponsored by U.K. Department of Food & Rural Affairs (DEFRA). Partner: UKTTF, GEI To improve the capacity of China mills to supply legal and sustainable source produced timber product to the U.K. market (Plywood and Flooring)

7. Linking Business with Responsible Forest Management TFT in China TTAP Project Began March 2005, extended to Latin America and China January 07 Co-funded by EC (total euro 7 million), with funding from TTF partners of Belgium, Netherlands and the UK and TFT Partner countries: Cameroon, Congo Brazzaville, Gabon, Indonesia, Malaysia, Brazil, Bolivia, Guyana and China Overall objective To ensure wood products imported to the EC are verified legal Working with individual supply chains, linking buyers with their suppliers Policy, communications, tools for buyers and suppliers

8. Linking Business with Responsible Forest Management China Wood Supply Chain Study DEFRA-sponsored analysis of China’s wood industry supply chains, with particular focus on the plywood and flooring sectors; Drew upon TFT’s own experience with China mills, industry interviews, and independent research; Findings highlight the complex nature of supply chains and the difficulty of ‘proving’ legality, even for domestically sourced materials

9. Linking Business with Responsible Forest Management Chinese Wood Processing Industry Highly dependent on international supply – particularly in the export processing sector; estimates that 46% of China’s fibre supply (including pulp and paper) is imported; 70% of imported wood is estimated to be re-exported; Emergence of private firms and industry ‘clusters’ Industry highly competitive with immense cost pressures Thousands of processors, many small to medium size Little product differentiation, little pricing power – Few brands Overproduction and excess capacity across all sectors Result – low profitability and a cutthroat market

10. Linking Business with Responsible Forest Management Wood Distribution in China Many links in the chain Dominated by traders and middlemen Much of local supply dependent upon small farmers Small to medium processors cannot go direct due to lack of capital and access to international markets – and as such need to utilize traders and middlemen Each step, or hand, in the chain increases difficulty of providing proof of legality – as well as costs

11. Linking Business with Responsible Forest Management Wood Supply Chains in China Supply from illegal or ‘questionable’ sources is widely acknowledged to be common (Russia, SE Asia, Africa) Driven by demand and supply factors – lower costs, no requirement from international buyers for proof of legality Most local firms lack the capability to implement WCS Chinese government now starting to recognize that they cannot ignore sources and legality of their wood products imports

12. Linking Business with Responsible Forest Management ‘ Typical ’ Plywood Veneer Supply Chain Farmers/Village/ Township harvest trees Delivery to village log yard (private) Logs trucked to central log yard (Pizhou/Linyi) Veneer peelers purchase logs Veneer shipped to plywood mill Mill buyers arrange veneer sales Logs peeled into veneers Logs trucked to veneer peelers

13. Linking Business with Responsible Forest Management Plywood F/B Supply Chain Forest concession (small) Plywood Mill PRC Agent - Importer (logs) Other PRC plywood mills Forest concession (large) Exporting Country Agent Veneer Processor Other veneer mills and/or processors Other PRC agents Veneer Processor Log buyer

14. Linking Business with Responsible Forest Management Flooring Supply Chain (A) Company A sawmill (Russia) Company A sawmill (Brazil) Local sawmills SE Asia/ South America External Customers Company A Factory Forest concession Company A Local log trader/ producer Raw Materials sawnwood Forest concession

15. Linking Business with Responsible Forest Management Flooring Supply Chain (B) Dealer Other PRC Agent Forest Concession (small) Other PRC plants SE Asia Agent Forest Concession (large) Local log trader/ producer Sawmill(s) Company B PRC Agent

16. Linking Business with Responsible Forest Management TFT Case Study in China Member needed: A high volume… …of tropical hardwood plywood Of good quality, delivered on time at the right price point Sourced in line with the customer’s wood purchasing policy …which means no illegal wood or controversial sources… … and preferably FSC wood or wood from forests moving toward it

17. Linking Business with Responsible Forest Management What to do? (1) Find the right partner supplier Which means Forests… …with a legal right to harvest.. …the right volume of wood…..of the right species, at the right price.. …with an interest in certification… …and a willingness to engage in a program to achieve it… …AND that will enter into a deal to sell to the supplier!! It’s not easy!

18. Linking Business with Responsible Forest Management How to do it SE Asia log supplier (legal supply) PRC plywood mill UK customer China forest concession (logs)

19. Linking Business with Responsible Forest Management Lessons Learned What we know now – or what we know better – that will impact the ability to determine legality of Chinese wood products: Lack of transparency of supply systems in overseas source markets China’s domestic wood distribution systems, with individual farmers, small traders and small manufacturers all prominent players The number of ‘hands’ through which a single piece of wood may transit, both for domestic and imported raw materials Lack of capability within Chinese firms, or an ignorance of the need to monitor or track their wood resource supply chain Costs for firms to implement a WCS and to source legal wood from overseas deters them from taking these steps No incentives/demand from overseas customers to require documents attesting to the legality or sustainability of raw materials

20. Linking Business with Responsible Forest Management How to Get to Legality Market incentives/disincentives from industry and consumers; Assistance extended to Chinese industry to provide tools for wood tracking and access to legal raw material resources; Governance issues in supplying countries addressed and improved; Work with Chinese authorities on the importance of issue, and how to improve control systems

21. Linking Business with Responsible Forest Management Summary The demand for legality is gaining influence; Chinese producers can make progress on legality issues, given the right incentives; Current state of many Chinese producers supply chains means that proving legality is a tricky and daunting prospect; Legislation, boycotts, and/or aggressive PR campaigns cannot in themselves resolve this ; Government, NGO sector, and INDUSTRY – buyer and seller – need to work together to have the greatest impact

22. Linking Business with Responsible Forest Management Contacts & Further Information Tropical Forest Trust Matthew Brady, China Project Manager Tel +86 136 0225 9480 E-mail m.brady@tropicalforesttrust.com Lewis Du, China Project Officer, Shanghai Tel +86 136 0101 5640 E-mail lewis.du@tropicalforesttrust.com Web: www.tropicalforesttrust.com